Tag: Banking in the United States

The Definition of Insanity

Is government housing policy:

Recent steps by federal regulators make it clear: low down-payment loans, a feature of the housing market’s boom, are coming back.

On Monday, Federal Housing Finance Agency Director Mel Watt announced that mortgage-finance companies Fannie Mae and Freddie Mac would start backing loans with down payments as low as 3%.

And on Tuesday, three federal agencies approved a loosened set of mortgage-lending rules, removing a requirement for a 20% down payment for a class of high-quality loan known as a “qualified residential mortgage.”

Loans with little to no down payment were a common feature of the lax lending practices that were prevalent during the housing market’s bubble years.

Yes, my friends. Not content with easy mortgages wrecking the economy and destroying what little wealth the poor and middle class had accumulated, our government is back for more.

Why on Earth would they want to do this? McArdle:

Because, I think, most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years. We think of 2008 as an aberration, rather than reversion to the mean. And that’s a costly mental error.

The long, steep increase in American home prices from 1946 to 2008 was driven by a whole lot of trends that are hard to repeat: the invention of the 30-year, fixed-rate, self-amortizing mortgage, which allowed people to pay more for a house by lowering the monthly payments. The securitization revolution, which lowered mortgage risk by bundling the loans into large, diversified portfolios, thereby lowering rates. Rising inflation, which pushed up the price of houses. Falling inflation, which lowered interest rates and monthly payments still further and allowed people to pay even more for those houses. The credit-scoring revolution, which allowed banks to offer loans to more people, increasing demand for the existing housing stock. And in dense coastal areas, you also had the rise of NIMBY zoning laws, which made housing scarcer and therefore more expensive.

The problem is, these things have already happened. Most of them cannot happen again — interest rates can’t really go much lower.

Out government is consumed with the idea that home ownership is the path to wealth for the poor and lower middle class. But nothing could be further from the truth, as the last decade proved. The housing bubble hurt the wealthy … a bit. But it completely burned what little wealth existed in the lower quintiles of our society.

The reason is that houses aren’t a great investment. They’re a good investment … if you have a stable income and employment situation and can manage money well. They’re a stable investment … if you have some equity. But people are besotted with idea of real estate as the gate to wealth.

Low down-payment loans are especially dangerous for people trying to climb the economic ladder. They can allow people to make a quicker entry into housing. The danger, however, is that a house with low equity is a highly leveraged investment. If you make a down payment of 3% and housing prices fall 3%, 100% of your equity goes up in smoke. The reason so many people ended up in underwater mortgages with negative wealth was because they had such a thin margin of equity.

But … they never learn. This will happen again and they still won’t learn. The people running our government and their cheerleaders in places like the Center for American Regress will continue to believe that there is a alchemical formula for creating middle-class wealth out of thin air. I guess you have to believe in something when you think that businesses don’t create jobs.

WTF does this mean?

One of the biggest “Too big to fail” banks , and one of the ones deepest in bed with our government, has just put in place regulations that limit cash withdrawals and prohibit all outgoing international bank wires. As you can see I needed to link to a foreign article to get this information sourced, as our news media here in the US seems to be uninterested in talking about this baffling event. This is the sort of shit banana republics do when they fear people will move money out of the country right before they do a currency devaluation or some kind of monetary confiscation. I think we need to remain vigilant and see if other banks follow suit. If they do then we got a serious problem and some real nasty shit coming our way it looks like.

If you want to be pissed at the big banks do it for this reason

Because having politicians making rules that pay off their favorite big banks in return for the big money and power they then help the politician get is the real reason to be pissed at these big banks that are in bed with the politicians.

So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.

Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.

Government likes them big and dependent, because that’s how you get your tit-for-tat going. I remember how we got told by the nanny staters back in the 80s that if they didn’t bail out the S&L banks that where going to go belly up we would get hammered and our economy would never recover. Reagan told them to go pound sand and let the banks that had done the stupid stuff which landed them in the trouble they were in go dead. A year later the economy was flying again, and the banks that had not engaged in the risky and stupid behavior took up the slack and earned the rewards for having done the right thing.

But not everyone took that lesson to heart. Less than a decade later we had government literally change the rules to make it a given that we would end up with these super banks that would then be too big to fail. Most of the impetus behind that was the whole home ownership lending industry, which necessitated an inordinate level of meddling by government in the whole market to force the economically disastrous socio-engineering steps government wanted all lenders to bow down to. Before you start arguing with me that the problem isn’t the incestuous relationship that allows politicians to reap huge benefits from tax payer subsidized big banks, check this section from this article out:

Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy. The result is a bloated financial sector and recurring credit gluts. Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009.

Note that the focus is on how the financial industry spends all that money lobbying for the tax payer subsidy, implying that the problem is the financial industry and lobbying. But the issue isn’t that they are doing this lobbying. It’s that our politicians have create a system that benefits them immensely because it all but necessitates these unviable entities buying favors from them.

I am now convinced TARP was a bad idea, even when it was half of what Pelosi and her clique eventually jacked it up to. We should have let these behemoths implode and the institutions that had not participated with government in the myriad of ludicrous socio-engineering schemes pick their carcasses clean. Of course, if the nanny state hyenas in government had allowed this to happen, they could kiss any and all attempts at coercing banks to go along with any existing and future socio-engineering schemes goodbye, and the socio-engineering politicians would rather throw away trillions of tax payer dollars and destroy the country than lose their power, influence, and money making schemes and scams.

Me, I say cut these big banks off. Let them die. And let the f-ing politicians that support them, in either party, die with them. No freebees from tax payers to line politician’s pockets.

The Bailouts and the Risk

It’s Bank Bash time again here at RTFLC. Presented for your consideration: the Atlantic’s expose on how tenuous the banks hold on sanity really is:

The financial crisis had many causes—too much borrowing, foolish investments, misguided regulation—but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode.

Note that they are talking specifically about the banking crisis, not the mortgage crisis that precipitated it. That’s another issue entirely.

For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.

It’s a very long read, but worth it. The go through the recent LIBOR and JP Morgan scandals and points out just how deceitful and opaque the banks have been on these subjects. The note how hesistant investors and the public are of investing in banks or entrusting their money to banks. They go through the books at Wells Fargo and discover just how opaque their investments are. In most cases, the value of trillions of dollars in assets is a guess. At best.

The solution they point to is not more Dodd-Frank or Sarbanes-Oxley complexity. No, it’s straight-forward disclosure to investors and to the general public who have, through TARP and the Federal Reserve, become the ultimate fiscal backstop:

The starting point for any solution to the recurring problems with banks is to rebuild the twin pillars of regulation that Congress built in 1933 and 1934, in the aftermath of the 1929 crash. First, there must be a straightforward standard of disclosure for Wells Fargo and its banking brethren to follow: describe risks in commonsense terms that an investor can understand. Second, there must be a real risk of punishment for bank executives who mislead investors, or otherwise perpetrate fraud and abuse.

These two pillars don’t require heavy-handed regulation. The straightforward disclosure regime that prevailed for decades starting in the 1930s didn’t require extensive legal rules. Nor did vigorous prosecution of financial crime.

Since [the 1980’s], however, the rules have proliferated, the arguments about compliance have become ever more technical, and the punishments have been minor and rare. Not a single senior banker from a major firm has gone to prison for conduct related to the 2008 financial crisis; few even paid fines. The penalties paid by banks are paltry compared with their profits and bonus pools. The cost-benefit analysis of such a system tilts in favor of recklessness, in large part because of the complex web of regulation: bankers can argue that they comply with the letter of the law, even when they violate its spirit.

The Basel I agreement was 18 pages long. Basel III is 616 pages long. And the current financial disclosure agreements can mean thousands of columns of numbers. Dodd-Frank may be end up being 30,000 pages long. Does that sounds like a transparent banking system to you?

Our government, of course, loves this situation because it means they can employ lots of regulators and gets lots of lobbyists genuflecting to them. But the result is that banks that don’t even know how much money they have.

This isn’t a fix. This is a system that employees zillions of regulators and lobbyists while our banking system becomes more complex, more opaque and more vulnerable. It makes bankers rich and unaccountable while leaving the taxpayers holding a bag that might be trillions of dollars deep.

And we really shouldn’t be surprised that this situation has only gotten worse under supposed communist Barack Obama. Matt Taibbi also has an article out detailing some of the chicanery behind TARP, particularly the way the Obama administration retasked it, lied about the use of TARP, lied about the health of the banks and allowed them to find ways to pay out gigantic bonuses despite the provisions that supposedly prevented it. He eventually reaches an identical conclusion: TARP has created a banking system that is more centralized, more complex and more at risk than ever before.

It’s not just the politicians, of course. What jumps out at you from the Taibbi article is the overweening sense of entitlement that emanates from the big banks: a sense of entitlement so profound, AIG (not a bank but it pretends to be one) is considering suing the government that loaned it $180 billion because its stock crashed.

(The Rolling Stone Article is a tough read because of Matt Taibbi’s famous bullshitedness. According to him, the only people who opposed TARP and stood in the way of this crony capitalist juggernaut were progressives. The battle over the bailouts is seen entirely in those terms. He completely ignores the deep conservative opposition to it. He says that TARP initially died because “95 democrats lined up against it” ignoring that 133 Republicans lined up against it too and that a majority of Republicans opposed in the eventual passage of the bill. Here’s the fucking roll call.)

We are not safer than we were five years ago. Our banking system is not more secure or more regulated. And, at some point, this is going to blow up on us.

John Huntsman was one of few in Election 2012 who tried to alert us to the danger we face. Ron Paul and Gary Johnson have also warned us about the danger of handing out large sacks of Federal Reserve funny money. But no one in power has picked it up. They’re too busy fighting each other over self-created crises like the fiscal cliff. And while they’re fighting over that cliff, we’re in danger of the whole fucking mountain falling out from under us.

This is being spun as an issue for “progressives” but it’s just as critical to conservatives and libertarians who value a sound banking system and straight-forward laws (also, you know, a functioning economy). We have to realize that this mess is bipartisan. Republicans may have opposed Dodd-Frank, but they haven’t exactly been proposing a new regime of better law. And Democrats may bash the big banks, but they take their campaign contributions and make sure no one knows what’s going on behind the doors.

No, it’s going to have to come from outside Washington, from the hundreds of millions of Americans who loaned the banks trillions and are still holding the bag four years later. I just fear that we won’t do anything about it until the next financial collapse plunges us into a dark age.

Modern Day Javerts

You know why I get irritated when people call Obama a Secret Communist Anti-Colonialist Crypto-Marxist Douchbag? Because if he actually were one, it would almost be preferable. At the very least, we wouldn’t have shit like this:

Richard Eggers doesn’t look like a mastermind of financial crime.

The former farm boy speaks deliberately, can’t remember the last time he got a speeding ticket, and favors suspenders, horn-rimmed glasses and plaid shirts. But the 68-year-old Vietnam veteran is still too risky for Wells Fargo Home Mortgage, which fired him on July 12 from his $29,795-a-year job as a customer service representative.

Egger’s crime? Putting a cardboard cutout of a dime in a washing machine in Carlisle on Feb. 2, 1963.

Now before you start bank bashing … and I’ll bash some banks later on, let’s go into exactly why Wells Fargo fired him for having done a stupid stunt before men landed on the moon. It’s not because they are an evil company.

Big banks have been firing low-level employees like Eggers since the issuance of new federal banking employment guidelines in May 2011 and new mortgage employment guidelines in February.

The tougher standards are meant to weed out executives and mid-level bank employees guilty of transactional crimes, like identity fraud or mortgage fraud, but they are being applied across-the-board thanks to $1-million-a day fines for noncompliance.

Banks have fired thousands of workers nationally because of the rules, said Natasha Buchanan, an attorney with Higbee & Associates in Santa Ana, Calif., who has helped some of the banking workers regain their eligibility to be employed.

“Banks are afraid of the FDIC and the penalties they could face,” Buchanan said.

The regulatory rules forbid the employment of anyone convicted of a crime involving dishonesty, breach of trust or money laundering. Before the guidelines were changed, banks widely interpreted the rules to exclude minor traffic offenses and some other misdemeanor arrests.

New rules have eliminated exceptions for expunged crimes and certain minor offenses and expanded the categories of employees covered, Buchanan said.

Of course, the bank executives — you remember those guys? — the ones who turned the financial system into a cat’s cradle made out of uncooked spaghetti and then came to us with their hands out when it fell apart? Yeah, this not sweeping them up. In fact, Wells Fargo agreed to pay the Feds $175 million to make a high-level investigation go away.

There’s a waiver process for people who have mended their ways — like Eggers, who has not put a fake coin in a laundry machine recently. But the process takes time … unless you’re a high-powered executive. And the banks are prioritizing getting those waivers for … high-powered executives. The FDIC may issue a grand total of 74 waivers this year. They are not going to people like Eggers.

This is not communism. It’s not capitalism either. It’s the Corporate Welfare State, where profits are privatized, losses are socialized, risks are encouraged and the wealthy well-connected bosses are never harmed. When the hammer does come down, for appearance’s sake, it comes on low-level employees and borrowers, not the big bosses or even the medium ones. And both parties are supporting this, as much as the GOP likes to pretend they opposed TARP.

Now about those banks. This is yet one more data point for the case that the big banks have gotten too big and too powerful for the health of our nation and our economy. This is not a case where the free market has created a oligarchic banking system. This is a case where the government, by bailing out big banks and letting them use that money to buy up small banks, has encouraged this; has created this. I have made this argument before. But this is again in the news with Simon Johnson making the case that breaking up the big banks should be part of the GOP platform (if necessary, they can make room by dropping the planks on Shariah law and outlawing abortion without exception). Here is John Carney, quoting the TARP watchdog on the problem. I’ll quote Johnson:

The big opportunity for presumptive Republican presidential nominee Mitt Romney and for conservatives more broadly is to choose this moment to pivot against big banks. Ryan is plugged into the Tea Party wing of the Republican Party, which has been consistently opposed to megabanks and the subsidies they attract through being too-big-to-fail (talk to Representative Ron Paul).

Ryan can draw on the intellectual support of senior figures in the Republican Party — including former Utah Governor Jon Huntsman, the presidential candidate who had the strong support of the Wall Street Journal editorial page for his approach to breaking up the megabanks. Senator Richard Shelby — ranking Republican on the Senate Banking Committee — is cagier, but seems inclined to be skeptical of the value of the largest banks as currently constituted. Two weeks ago, Senator David Vitter co-wrote a brilliant letter to Federal Reserve Chairman Ben S. Bernanke on the problems the banks pose.

In addition to politicians, the emerging consensus among heavyweight Republican intellectuals is that bigger banks should be forced to fund themselves with much more equity relative to debt — in other words, capital requirements should be significantly higher for any financial firm whose failure can cause broad damage. The argument is that too-big-to-fail is too- big-to-exist and the right way to pressure banks to break up is through capital requirements that increase along with a bank’s size.

A Romney-Ryan ticket has the opportunity to tap the Republican populist tradition (think Teddy Roosevelt). The megabanks — such as Bank of America Corp., JPMorgan Chase & Co. (JPM) and Citigroup Inc. — have become today’s government-sponsored enterprises. They receive large, opaque and dangerous subsidies, encouraging them to engage in excessive risk taking. The question is how best to remove those subsidies.

Removing the subsidies isn’t enough. The damage to our political, financial and legal systems is too extensive. I do like the requirement of higher capital requirements, which has some support. But I fear that if we don’t do something about this soon, we’re going to have a much worse situation on our hands.

Because firing people like Eggers isn’t working the problem.

(H/T to Maggie McNeill for the post title).

Under President Obama & the democrats….

WaPo points out that data gathered shows that Wall Street firms — independent companies and the securities-trading arms of banks — have earned more in the first 2 1/2 years of the Obama administration than they did during the eight years of the George W. Bush administration. Why is this happening?

Behind this turnaround, in significant measure, are government policies that helped the financial sector avert collapse and then gave financial firms huge benefits on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks — low-cost money that the firms used for high-yielding investments on which they made big profits.

Stabilizing the financial system was considered necessary to prevent an even deeper economic recession. But some critics say the Bush administration, which first moved to bail out Wall Street, and the Obama administration, which ultimately stabilized it, took a far less aggressive approach to helping the American people.

That bolded section is pretty-speak, a bullshit attempt to soften the real problem because it doesn’t favor the leftists big-nanny-staters, for the Frank-Dodd bill was written in such a way that those kissing the right people in government’s asses and paying them off with enough lucre in the form of campaign contributions then could not just get oodles of tax payer money, but also make a veritable killing. And the fools keep blaming the banks and capitalism. In the mean time the crony capitalists are raking in money while those that claim to be the 99 percent rail at the wrong people.

“There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program, or TARP, the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.”

Neither the Bush administration nor the Obama administration, for instance, compelled banks to increase lending to consumers, known as “prime borrowers.” Such a step might have spurred spending and growth, although generating demand for loans may have proved difficult in the downturn.

Right, because as we saw before, “compelling” banks to do things, like lending money to people that were so high risk that a default was a “when” not an “if”, never ends badly. These fuckwads miss the point: both TARP and the Dodd-Frank bill were about increasing the power of the political class. And tax payers paid for it.

A recent study by two professors at the University of Michigan found that banks did not significantly increase lending after being bailed out. Rather, they used taxpayer money, in part, to invest in risky securities that profited from short-term price movements. The study found that bailed-out banks increased their investment returns by nearly 10 percent as a result.

Guess which bill gave them permission to do this kind of investments? And which bill required banks to keep an inordinately large amount of cash on hand rather than do anything with it too, leading to less lending amongst things. Which one added a massive layer of bureaucracy & costs, while cutting their profits? And which one is now going to cause more trouble. Don’t:

Some of Wall Street’s success has moderated in recent months, with bank stock prices down and layoffs on the rise. This mostly has reflected the renewed slowdown in the U.S. economy this year and the European debt crisis buffeting global markets.

Representatives of the financial industry say regulations in last year’s Dodd-Frank legislation, which Obama pushed for and signed, also have crimped bank profits. But many analysts think the law will make the financial system more stable. The legislation, for instance, requires banks to maintain a greater capital cushion to withstand losses during bad economic times. The measure also created a regulator whose sole purpose is to police lending to ordinary Americans.

Stable indeed. Less loans, and loans are risky in a collapsing economy, are sure to make the lending industry more stable. Less profits means the consumer pays more for services that before might even have been labeled “free”. And there are far more regulations yet to come which all will have onerous effects and create special needs to go beg politicians for exclusions/exceptions. For the right price, of course. But don’t lose focus. The point is these guys are making a killing right now under Team Obama’s rules.

Compensation at these firms also has bounced back. Financial firms paid about $20.8 billion in bonuses for work done in 2010, according to research by the New York state comptroller. In New York City, the average Wall Street salary last year grew 16.1 percent, to $361,330, which is more than five times the average salary of a private-sector worker in the city.

By contrast, millions of Americans continue to face economic difficulties. That is fueling broad public anger at Wall Street and has given rise to the “Occupy” protest movements nationwide.

And yet, it is these very crooks that are helping Wall Street rake in the money, for a nice cushy fee, that now pretend they are standing firm against Wall Street raking in all that money. And the morons are all falling for it. Helps to have outlets like WaPo fluff up the facts – Wall Street has made more money thanks to Obama in 2 ½ years than they did the previous 8 under evil BoosChimpyMcHitler – like they did in this bullshit piece. The data doesn’t lie though: the rich fat cats are making out better under Obama than they did under Bush, and they are doing it in a down economy. And the rest of us are hurting worse and being told to pony up more money. No amount of smoke can hide that.

And Burn the Banks Down

Part two of my posts on housing and banking.

If you want to know why I have some shred of sympathy for OWS despite some of their repugnant behavior (that Kos link is priceless, BTW), here is the reason:

Liberal protesters “occupying” Wall Street hate the big banks, which they see as the engine of capitalism. But conservatives ought to hate the big banks because they are the enemies of capitalism.

In addition to the Fannie/Freddie conforming loan increase I blogged about below, Bank of America moved $55 trillion in derivatives to an arm that is backed by the FDIC. We, the taxpayer, are now on the hook for their speculative bullshit. I’m no fan of Glass-Steagle but … Jesus, can’t we do something about that?

But it gets even worse:

A Government Accountability Office report highlighted plenty of conflicts of interest at the Federal Reserve. New York Fed official Stephen Friedman was on the board of Goldman Sachs and actively buying up shares of Goldman while the Fed moved to give Goldman special access to its lending windows.

JP Morgan CEO Jamie Dimon sat on the New York Fed’s board while the Fed was pouring billions of bailout dollars into JP Morgan and granting JP Morgan special regulatory exceptions.

How is this not a crime? How is not corruption that so many in the regulatory agencies have now found six- and seven-figure jobs in the very industry they refused to crack down on? Maybe there is no technical law being violated. But can we not pass a law requiring public officials to stay out of industries they regulate for at least five years? Can we not at least shame these corrupt douchebags for their repellent behavior?

The banking industry is a bigger problem than ever, not withstanding the sack of shit called Dodd-Frank. As John Huntsman recently pointed out, the taxpayers’ exposure on the big banks has only increase since the crisis. The “too big to fail” banks control more of the industry than ever before, having used TARP mainly to buy other banks. And as Russ Roberts points out, we made sure that banks and their cronies got 100% of their money out of the financial crisis. Many avoided having to taking losses at all on the financial crisis they gleefully participated in and made tens of millions off.

Look at those links I just put up. Russ Roberts is anti-Keynesian free market economist. John Huntsman is a fiscally conservative Republican. Tim Carney is a libertarian. These are not dirty hippies saying “fight the power”. All three are free market believers who are saying what OWS is saying — enough is enough.

Now OWS and the Left are wrong on what do about the banks. Forgiving student loan debt would hurt the banks, but it massively unfair to people who paid for their own education. Forcing banks to write down mortgage principal is another bad idea that would either require a gigantic violation of contract law or, effectively, the government bailing out the banks again on their bad mortgage debt. Maybe Matt Yglesias is right that we need to change the way banks account for their gains and losses, but that’s a long-term fix.

Break the big banks up. “Too big too fail” is too big to exist. The right time to do this was when they came begging to us for TARP. But we can’t afford for another financial bubble to blow up in our faces. This time, it will be even worse. This time, it may break the whole damned system.

I’d say this is one of those time when the free market has failed, but it’s not. It’s one of those times when the unfree market has failed. TARP and regulatory capture created these monster banks from corruption and influence-peddling. It’s time we turned the clock back on that.

The Taibbi Plan

Matt Taibbi, one of the key members of the More Clever than Smart Club, has an essay on what he would have OccupyWallStreet demand. It’s making the rounds. Let’s go through it. I’ve almost finished reading The Big Short, a book you really should read to understand the recent financial crisis. So this will serve two purposes: responding to Taibbi and talking about what I learned from Michael Lewis.

1. Break up the monopolies. The so-called “Too Big to Fail” financial companies – now sometimes called by the more accurate term “Systemically Dangerous Institutions” – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled; a good start would be to repeal the Gramm-Leach-Bliley Act and mandate the separation of insurance companies, investment banks and commercial banks.

I don’t entirely disagree with this point. I thought as much in 2008 when we were told we had to bail out companies because they were “too big to fail”. If that’s the case, we need to stop them from being so big. We’ve broken up monopolies before; I don’t see why we should stop now.

That having been said, I’m dubious that this will achieve anything. As Reihan Salam points out, other countries have done fine with the same system. This idea hinges one whether you accept the idea that companies are too big to fail. I’m not sure I do.

2. Pay for your own bailouts. A tax of 0.1 percent on all trades of stocks and bonds and a 0.01 percent tax on all trades of derivatives would generate enough revenue to pay us back for the bailouts, and still have plenty left over to fight the deficits the banks claim to be so worried about. It would also deter the endless chase for instant profits through computerized insider-trading schemes like High Frequency Trading, and force Wall Street to go back to the job it’s supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow.

Several problems with this one, which is a favorite of the Left. First, a transaction tax will never go away after it’s “paid” for the bailout (which is already mostly paid back). It will stay with us longer than the phone tax that was instituted for the Spanish-American War and was repealed in … 2006. Moreover, the biggest outstanding bailouts are Chrysler, GM and Freddie/Fannie. How is a transactions tax going to punish them?

Second, the big problem here was not high frequency trading, which is a minor irritation. It was the entire system acting stupidly with mid- to long-term investments. Credit default swaps and collateralized debt obligations were sold with the anticipation of years of risk-free revenue. Howie Hubler didn’t lose $9 billion on high-frequency trading; he lost it betting on huge CDO’s.

Which brings me to a point that Taibbi doesn’t address at all — the ratings agencies. Michael Lewis makes it crystal clear that the ratings agencies — S&P and Moody’s — had no fucking clue what was going on. They would give ratings to mortgage bonds without bothering to find out what was in them. In fact, they specifically told their employees not to look. The result was that tranches of triple-B mortgage bonds were put together into CDO’s that they rated AAA. People — investors who were interested in “making sober investments in job-creating businesses and watching them grow” bought these, thinking they were as safe as Treasury Bonds. They clearly weren’t. And not only did the ratings agencies not suffer for their massive failure, Dodd-Frank strengthened their control of the market.

The primary influence of Wall Street on the financial crisis was that high-stakes mid-term gambles brought banks to their knees and they “had” to be bailed out. But perhaps an even greater influence was that the mortgage bond market created an upward suction on the mortgage market. People were making billions off of mortgage-based securities. To feed that money engine, more mortgages were needed. This created not only immense pressure but immense profits for mortgage brokers who sold people houses they couldn’t afford, sold them on bad ideas like option loans and sold no-document loans. The mortgage sellers didn’t care if the loans were good because they were selling them right to Wall Street. Wall Street didn’t care because they were selling them to each other.

Yes, there was pressure from the Community Reinvestment Act and ACORN. But that was a comparatively small effect. The tranches that did in the big banks and crashed the system were Alt-A: mortgages sold to people who had good credit scores. Everyone knew the mortgages sold to poor people were bad; it was the mortgages sold to middle class and wealthy people that broke the system.

A transaction tax does not address this problem at all. What would have addressed it was letting the banks go bust. People who bought bad mortgages suffered — they lost their homes, their credit rating and their savings. That’s what should happen when you let the bank talk you into doing something stupid. But the banks didn’t suffer.

Here’s a better idea that would replace Taibbi’s points (1) and (2). Rewrite Dodd-Frank so that any company that is bailed out in future has to fire their Board of Directors. Rewrite it so that companies that are bailed out will be eventually liquidated or broken up. Re-inject moral hazard so that companies see bailout as a last resort, rather than a first one.

3. No public money for private lobbying. A company that receives a public bailout should not be allowed to use the taxpayer’s own money to lobby against him. You can either suck on the public teat or influence the next presidential race, but you can’t do both. Butt out for once and let the people choose the next president and Congress.

I have no problem with this … if it includes agencies like ACORN that get loads of public money as well as public employee unions and public employees and government contractors (which would often include me). What Taibbi wants is to single out only some of the people sucking on the public teat; the ones he doesn’t like. Everyone else can go ahead.

4. Tax hedge-fund gamblers. For starters, we need an immediate repeal of the preposterous and indefensible carried-interest tax break, which allows hedge-fund titans like Stevie Cohen and John Paulson to pay taxes of only 15 percent on their billions in gambling income, while ordinary Americans pay twice that for teaching kids and putting out fires. I defy any politician to stand up and defend that loophole during an election year.

I sort of agree with this one. I see no reason why a businessman earning half a mil in salary should be taxed at twice the rate of a hedge-fund manager. The carried interest rule was a mistake.

However, I doubt this will actually work. People do not get rich by allowing the government to figure out how to tax them more. And the carried interest rule exists for a reason. Jim Manzi has pointed out that it would be child’s play for hedge fund managers to shift the funds so that they become capital gains or other forms of equity.

A better idea would be an overhaul of the tax system that keeps it simple and eliminates the complexities that allow income to be sheltered and fed the financial doomsday machine.

5. Change the way bankers get paid. We need new laws preventing Wall Street executives from getting bonuses upfront for deals that might blow up in all of our faces later. It should be: You make a deal today, you get company stock you can redeem two or three years from now. That forces everyone to be invested in his own company’s long-term health – no more Joe Cassanos pocketing multimillion-dollar bonuses for destroying the AIGs of the world.

This would be a huge mistake, I think. We have attempted this before and the result has always been bad Unintended Consequences. If you force them to get company stock, what’s going to happen? Well, precisely what happened in the 90’s — a stock market bubble. You’re going to have CEO’s deliberately or fraudulently inflating their stock so they can cash out.

The principle is also warped, in my opinion. If a company wants to pay bonuses to people before they do anything, let it be on their own head. We already have “say on pay” thanks to Dodd-Frank. As long as we don’t bail them out — or at least make bailout conditional on canceling bonuses — this problem will take care of itself. We don’t need to stop companies from being stupid; bankruptcy will do that for us.

This post and my response circles what I’m thinking about OWS. It is a typical liberal event. They have correctly identified the problem: big business has too much influence in Washington and vice-versa. But they are dumb as a bag of hammers when it comes to the solution. Taibbi’s proposal, lauded in liberal circles as “restrained”, would inevitably create another bubble, would create massive legal challenges that would tangle up the courts and would not address some of the biggest problems: the ratings agencies and the government’s willingness to cover up the stupidity of investors.

We turned down this road with TARP. Now is not the time to double down. Now is the time to work the problem.

The Last Bailout … and the Next


Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.

It wasn’t just US banks; foreign banks got tens of billions in this secret TARP deal. The revealing thing for me is not how much the banks got — I suspected the number was in this ballpark. It’s just how scarily close we came to a complete system meltdown.

What really gets me, however, is how little responsibility has been taken for the banking collapse. Yeah, I know — it was all CRA, ACORN and the government forcing banks to lend money to poor people. But it wasn’t poor people who created credit default swaps. It wasn’t the CRA that made banks stupidly (and often fraudulently) pack mortgages into investment vehicles and sell them to each other. The massive leveraging our bank system was not ACORN’s idea. The bankers can take all the credit they want for those “innovations”. Isn’t someone going to go to jail for this mess? The S&L bailout cost a lot of money too, but at least the crooks went to jail.

In the meantime, we can rest easy knowing that this sort of debt bubble will never … what was that?

This chart looks like a mistake, but it’s correct. Student loan debt has grown by 511% [between 1999 and 2011]. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

Obviously the number of students didn’t grow by 511%. So why are education loans growing so rapidly? One reason could be availability. The government’s backing lets credit to students flow very freely. And as the article from yesterday noted, universities are raising tuition aggressively since students are willing to pay more through those loans.

Ah, yes. Now this is one we can blame on liberal interests and politicians. They have been pushing harder and harder on the education bubble. And many want to make it worse with direct federal loans (call it Fannie Ed) or “forgiveness” of loans if someone enters a politically-correct industry.

Hang on to you wallets, guys. It’s going to get worse before it gets better.